January 2016

Remarking that the opening month of 2016 was turbulent would be an understatement. The Euro Stoxx 600 (Net EUR) fell nearly 12% (to 20th) and then recovered to close down -6.4%. Pan European property shares were not immune but fared a little better with EPRA Europe ex UK (in EUR) down -3.0%. The UK was the underperformer falling -5.8% (in GBP) led by the Central London focused midcaps and the largest names (who were also caught up in FTSE100 index selling).

The ECB President hinted at more monetary stimulus from the central bank and the Bank of Japan adopted negative interest rates. Carney at the Bank of England also alluded to lower for longer and the subsequent MPC minutes saw a unanimous vote to hold rates.

The pan European benchmark (which is in GBP) fell just -1.95% as the currency exposure is just 35% GBP and the remainder is European currencies of which EUR accounts for 51%. The fund continues to align its currency exposure to that of the benchmark. The weakening of GBP versus EUR by 8% since the end of November has clearly been beneficial.

Whilst property is not immune from the threat of global slowdown, it remains a domestically focused income stream which in many instances is highly resilient and we expect the group to be one of the few equity sub-markets to see consistent EPS growth in 2016 across the vast majority of companies.

The fund’s NAV fell-2.25%, underperforming the benchmark by 30bps. This underperformance was driven by our overweight to the UK and in particular the London focused stocks. Whilst we had reduced the overall size of our holdings in businesses such as Great Portland, Derwent London and Workspace in Q4 2015 we continue to believe in their core strategies of manufacturing internal growth through development and regeneration of their portfolios. However we have also favoured those businesses which have reduced their financial gearing in the expectation of more volatile market conditions. Land Securities is a good example.

Our underweight to Swiss stocks (which outperformed rising 1.2% in CHF) was also a headwind. Swiss stocks traditionally outperform when markets suffer negative sentiment but we consider local economic conditions to have been weakened by the renewed strength in the currency following removal of the peg.

Following completion of the extension and refurbishment at our largest property asset, the Colonnades in Bayswater we have continued to make progress on the lettings of the 5 retail / restaurant units. Agreements for lease have been signed on 2 of the restaurant units with two further units are under offer and in legals. The property portfolio will be revalued at the year end in March.